the northeast solid waste committee project: planning and

© 1997 Office of the Inspector General, Commonwealth of Massachusetts. All rights reserved.

Robert A. CerasoliInspector General

December 1997

THE COMMONWEALTH OF MASSACHUSETTSOFFICE OF THE INSPECTOR GENERAL

The North East Solid Waste Committee Project:Planning and Development ofa Public Private Partnership


December 1997

His Excellency the Governor

The Honorable President of the Senate

The Honorable Speaker of the House of Representatives

The Honorable Chairman of the Senate Ways and Means Committee

The Honorable Chairman of the House Ways and Means Committee

The Honorable Chairman of the House Post Audit and Oversight Committee

The Directors of the Legislative Post Audit Committee

The Secretary of Administration and Finance

Members of the General Court

Omnibus ad quos praesentes literae pervenerint, salutem.

This Office has been asked by a caucus of state legislators who representtwenty-three Massachusetts communities comprising the North East Solid WasteCommittee (NESWC) to investigate the NESWC resource recovery project. TheNESWC project is an extraordinarily expensive public-private partnershipplanned and developed by the Commonwealth in the 1970s and early 1980s as apartial solution to the state’s mounting solid waste disposal problems. Since theNESWC facility began operations more than a decade ago, the disposal fees paidby the NESWC communities have escalated sharply. NESWC communitiescurrently pay approximately $95 per ton for waste disposal – nearly twice the


current market price in the region. This rate is expected to exceed $215 per ton by2004. In promoting the NESWC project, the Commonwealth had assured theNESWC communities that they would actually be receiving a per-ton payment forwaste disposal after 1990.

In conducting this review, my Office focused on the central role played bythe Commonwealth in planning, developing, and marketing the NESWC project toMassachusetts communities. As this report reveals, although the serviceagreements developed by the Commonwealth protected the interests of NESWCfacility’s private owner-operator and bondholders, these agreements failed toprovide the NESWC communities with sufficient control over the NESWC facilitycosts or sufficient protection from the project’s considerable financial risks.

The NESWC case offers vitally important lessons about the potential cost oflong-term privatization contracts that allocate most of the risks to the public sector.Over the past several years, many Massachusetts communities have expressedinterest in vendor proposals to privatize municipal water and wastewater systemsthrough long-term contracts for construction, operation, and maintenance. Thesepublic-private partnership proposals offer certain desirable features to publicofficials, such as the ability to finance capital upgrades without issuing bonds.However, the NESWC story illustrates the financial risks inherent in such long-termarrangements.

The NESWC communities are bearing the brunt of the Commonwealth’sflawed economic analysis and failure to protect the public interest more than 15years ago. The current momentum to privatize water and wastewater facilitieswithout adequate planning, safeguards, and oversight could similarly burdencurrent and future taxpayers and ratepayers in Massachusetts with massive long-term costs and risks. My Office will continue to investigate the NESWC project andto subject new public-private partnership proposals to the critical scrutiny theywarrant.

Sincerely,

Robert A. CerasoliInspector General


Contents

Introduction .......................................................................................................... 1

Project History and Findings ................................................................................ 3

Finding 1. Because key business terms of the NESWC project had not yet beenestablished, the price proposals generated by the Commonwealth’s open-endedRFP were not reliable........................................................................................... 5

1a. The RFP did not specify the size of the proposed project. ...................... 5

1b. The RFP left key business terms open for negotiation with the selectedcontractor. ..................................................................................................... 7

1c. By the time the NESWC facility began operations in 1986, UOP’s 1975user fee proposal was irrelevant. ................................................................ 11

Finding 2. The service agreements negotiated by the Commonwealth with UOPposed significant financial risks to participating NESWC communities. ............. 12

2a. The service fee formula places most of the financial risk from oil pricefluctuations on the NESWC communities.................................................... 13

2b. The service agreements require the NESWC communities tocompensate MRI for “unforeseen changes in circumstances” that adverselyaffect MRI’s profits. ..................................................................................... 14

2c. The NESWC communities may be required to pay the full cost of capitalimprovements to the NESWC facility required by new environmental lawseven though the facility will be owned by MRI at the end of the contract. ... 15

2d. The service agreements require the NESWC communities to pay for thecost of disposing of a guaranteed minimum tonnage and contain a penaltyfor tonnage shortfalls................................................................................... 17

Finding 3. The Commonwealth aggressively marketed the NESWC project toMassachusetts communities. ............................................................................. 18

Finding 4. The NESWC project risks were depicted as minimal in publicitydisseminated by the Commonwealth and UOP.................................................. 20

Finding 5. The Commonwealth did not conduct a meaningful competition inselecting the consulting engineer responsible for overseeing construction of theNESWC facility................................................................................................... 26


Finding 6. The construction agreement negotiated between UOP and itssubsidiary, MRI, did not protect the interests of the NESWC communities. ....... 28

Finding 7. NESWC uncovered evidence that MRI might have manipulated theacceptance tests of the NESWC facility to conceal design and constructiondeficiencies. ....................................................................................................... 35

Conclusion ......................................................................................................... 37

Publication No. 18029-40-5C-12/97-IGO, approved by Philmore Anderson III, State Purchasing AgentPrinted on recycled paper

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Introduction

The Office of the Inspector General has been asked by a caucus of state

legislators who represent 23 Massachusetts communities comprising the North

East Solid Waste Committee (NESWC) to investigate the NESWC resource

recovery project.1 The NESWC communities dispose of solid waste at an

incinerator located in North Andover, under 20-year service agreements

scheduled to expire in 2005. NESWC developed out of an informal association of

public officials from communities in the Greater Lawrence area that began

meeting in the 1970s to explore solutions to the problem of declining landfill

space for the disposal of solid waste. The number of communities involved in

this association varied over the years prior to 1983, when all but one of the

current member communities signed the 20-year service agreements.2 In 1988,

NESWC was incorporated as a governmental body pursuant to Chapter 328 of

the Acts of 1988.

The NESWC project is a public-private partnership that was planned and

developed by the Commonwealth in the 1970s and early 1980s as a partial

solution to the state’s mounting solid waste disposal problems. The

Commonwealth selected a private contractor to design, build, and operate a

resource recovery facility capable of incinerating the municipal solid waste

produced by communities in northeastern Massachusetts and southern New

Hampshire and of producing electric power from steam generated in the

combustion process. The contractor was selected through a competitive

process, based on the contractor’s qualifications, proposed technology, and low

projected disposal fees. After the selection of the contractor, each of the 23

communities signed a 20-year service agreement that obligates the community to

1 The communities are Acton, Andover, Arlington, Bedford, Belmont, Boxborough, Burlington,Carlisle, Dracut, Hamilton, Lexington, Lincoln, Manchester, North Andover, North Reading,Peabody, Tewksbury, Watertown, Wenham, Westford, West Newbury, Wilmington, andWinchester.

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dispose of waste at the NESWC facility and pay a disposal fee that covers the

debt service payments for the facility as well as the cost of operating and

maintaining it.

The $197 million North Andover resource recovery facility is owned and operated

by Massachusetts REFUSETECH, Inc. (MRI), a subsidiary of Wheelabrator

Technologies, Inc. (Wheelabrator). The facility began operating in 1985 with a

rated capacity of 465,000 tons of waste per year. The NESWC communities

receive most of the revenue generated by the sale of electricity produced by the

facility and certain other revenues as an offset to the disposal fee.

The Commonwealth aggressively marketed the NESWC project to

Massachusetts communities, which were told that the financial risks would be

minimal. However, the risks of this public-private partnership have proved to be

substantial and have caused disposal fees to the NESWC communities to vastly

exceed initial projections. Although the service agreements developed by the

Commonwealth and signed by the NESWC communities contain protections for

both the bondholders and for MRI, the private owner-operator of the facility,

these agreements provide the NESWC communities with almost no control over

facility costs or protection from the financial risks of this public-private

partnership.

In the course of its review to date, this Office has reviewed project documents

provided by NESWC, the state Department of Environmental Protection, several

NESWC communities, State Street Bank and Trust Company (the trustee for

project financing), the state Department of Public Utilities, and other sources.

The Office has also interviewed state and local officials with involvement in the

NESWC project, legal and engineering consultants to the NESWC project, and

participants in other resource recovery projects in Massachusetts.

2 Twenty-two member communities signed service agreements between 1981 and 1983. Onecommunity, West Newbury, signed a service agreement in 1986.

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Project History and Findings

The Commonwealth took steps to plan and promote resource recovery projects.(early 1970s)

Starting in the early 1970s, the Commonwealth and municipalities throughout the

state began searching for alternatives to using landfills for municipal solid waste

disposal. Not only were landfills rapidly filling up, but they were coming to be

viewed as major sources of pollution as toxic substances leached out of them

into groundwater and aquifers.

A major resource recovery industry emerged in the early 1970s to promote and

develop private resource recovery facilities around the country. The term

“resource recovery” refers to the processing of solid waste in a manner that

recovers resources – such as paper, metal, glass, or energy – from the waste.

Generally speaking, a resource recovery facility either burns municipal and/or

commercial waste to produce steam that can drive turbines to produce electricity;

or else processes waste into a combustible fuel. The resource recovery industry

was spurred by decreasing landfill space and by the nation’s first energy crisis,

which heightened interest in developing new energy sources as alternatives to

fossil fuels.

In 1973, the Commonwealth enacted legislation that gave the resource recovery

industry a major boost. The legislation3 required the state Bureau of Solid Waste

Disposal (BSWD) to designate solid waste disposal districts throughout the state

and authorized the BSWD to lease land to private persons or firms for

construction, operation, and maintenance of private resource recovery facilities.

3 M.G.L. c.16, §18-24, as amended by Chapter 1217 of the Acts of 1973.

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The Commonwealth contracted with MITRE to plan and site resource recoveryprojects. (1973)

In 1973, the BSWD, which was located in the Executive Office of Environmental

Affairs, contracted with the Bedford-based MITRE Corporation, an engineering

consulting firm,4 to analyze the feasible locations and sizes of resource recovery

projects around the state. The BSWD’s contract with MITRE for preliminary

planning work proved to be the beginning of a close relationship that would grow

in scope and continue for more than 10 years.

The NESWC project was initially planned by the Commonwealth and MITRE to

be the first of at least five regional resource recovery projects.5 Although the

BSWD invested some efforts in the development of all five potential projects, the

agency ultimately focused primarily on the project that became the NESWC

project – the only resource recovery project planned and developed by the

Commonwealth that was actually constructed.

The Commonwealth solicited proposals for a resource recovery facility on behalfof the communities that would participate in the NESWC project. (1974)

In December 1974, the BSWD, with the assistance of MITRE, issued a request

for proposals (RFP) to design, build, and operate a resource recovery facility to

service the northeastern Massachusetts region at a site to be provided by the

Commonwealth in the town of Haverhill. According to the RFP, a project

objective was to save money for participating communities:

The goal of this project is the establishment of a solid wasteresource recovery facility to serve all or part of the northeast area ofthe Commonwealth of Massachusetts. The overall project

4 The nonprofit MITRE Corporation was a spinoff of the Lincoln Laboratory at the MassachusettsInstitute of Technology. The MITRE acronym stands for Massachusetts Institute of TechnologyResearch and Engineering.5 According to project documents and interviews, the other projects planned by theCommonwealth included the “128-West” project serving Newton, Wellesley, Natick, and othercommunities; the “Central Massachusetts” project, serving Worcester; the “Lower Pioneer Valley”project, in the Springfield area; and an Essex County project.

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objective is to minimize the cost to the User Communities ofdisposing of their solid waste subject to the maintenance of highstandards of technical, management and financial adequacy andenvironmental protection. [Emphasis added.]

The RFP stated that the Commonwealth would use a process of “proposal

evaluation and competitive negotiation” to select a contractor to design,

construct, and operate a resource recovery facility. The contractor would then

enter into a fixed-price, full-service contract with each user community in a form

approved by the Commonwealth. The facility would process the solid waste and

recover resources to be marketed in a manner proposed by the contractor.

The RFP stated that a contractor would be selected based on an evaluation of

the proposer’s qualifications, technical design, and proposed user fee. The RFP

further intended that the contractor would sign agreements directly with the

communities.

At the prebid conference held by the BSWD on January 7, 1975, the Assistant

Director of the BSWD explained the purpose of the procurement as follows:

What we are doing here, what we are trying to do is provide a jointpublic private solution to their [the NESWC communities’] publicproblem with the expertise of the private industry through theresource recovery processes that are being developed now.

Finding 1.

Because key business terms of the NESWC project had not yetbeen established, the price proposals generated by the

Commonwealth’s open-ended RFP were not reliable.

1a. The RFP did not specify the size of theproposed project.

At the time that the RFP was issued, no communities in the northeast region had

made firm commitments to participate in the project that would later become the

NESWC project. The RFP did include a letter from a local official who chaired an

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informal group of five communities in the greater Lawrence area. The letter

stated that the communities firmly supported the establishment of a resource

recovery plant in the area and intended to work with the Commonwealth and the

selected contractor to solve the region’s solid waste problem. However, the letter

did not commit the five communities to participating in the project. Of the five

communities – Andover, Haverhill, Lawrence, Methuen, and North Andover –

only Andover and North Andover ultimately signed the NESWC contracts.

The RFP made it clear that the Commonwealth planned to organize the regional

structure of the project after selecting the contractor and noted that 53

communities in northeastern Massachusetts and New Hampshire were potential

users of the project. However, because of the unknown size of the project

service area, the RFP solicited cost estimates for three alternative projects

whose size and functional requirements varied significantly:

� A small facility to serve a “core region” that included Andover, Haverhill,Lawrence, Methuen and North Andover, and would burn up to 310,000 tonsof waste per year;

� A medium-sized facility that would burn 527,000 tons of waste per year from53 communities in northeastern Massachusetts and southern NewHampshire; and

� A large facility that would burn 930,000 tons per year from an unspecifiedlarger number of municipalities in the northeastern Massachusetts andsouthern New Hampshire region.

The Commonwealth completed the selection process – and decided to award the

contract based on the largest facility – before marketing the contract to

communities in the target market area. As will be discussed, the size of the

facility had to be significantly reduced when the number of participating

communities proved smaller than the Commonwealth had anticipated.

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1b. The RFP left key business terms openfor negotiation with the selectedcontractor.

The RFP put proposers on notice that the Commonwealth wanted to generate

creative proposals from private contractors: “This RFP has been designed to

stimulate innovative response.” Thus, although the RFP provided a detailed list

of the contractor’s responsibilities and the Commonwealth’s responsibilities in

connection with the proposed project, the RFP deliberately deferred the

decisions regarding crucial business terms of the project until the negotiation

stage of the procurement.

Although the RFP contained a set of assumptions to be used to provide a

“common economic basis for comparative evaluation of the various responses,”

the RFP made it clear that proposers were expected and encouraged to devise

and propose their own business terms. The RFP explained that this approach

was designed to promote flexibility and enhance the relationship between the

Commonwealth and the selected contractor:

A competitive negotiation process will be used in selecting acontractor, as it provides flexibility to discuss and amend proposalspecifications, and to incorporate system complexities, andprovides for discussion of risk and responsibility. Additionally, thenegotiation process promotes greater understanding between theContractor and the Commonwealth and provides a strongerjustification of the award decision on the basis of technical,economic and management factors.

The RFP required proposers to propose a per-ton user fee, which was to

represent the disposal price the participating communities would pay the private

operator, for each of the three project options set forth in the RFP. The proposed

user fees were to be calculated on the basis of the economic assumptions set

forth in the RFP. However, the RFP made it clear that the actual costs of the

project to participating communities would hinge on the outcome of the

competitive negotiations. The Commonwealth intended to negotiate the

conditions under which user fees could increase, the formula to be used in

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dividing the facility’s revenues between the contractor and the participating

communities, the refuse tonnage to be guaranteed to the contractor, and other

crucial factors that would ultimately determine the cost of the project to the

participating communities.

The following are examples drawn from the issues listed in the RFP under the

heading of “Negotiable Terms and Conditions”:

� Actual user fee and landfill fees based on changes in assumed costs and/orconditions.

� Escalator factors may be negotiated before a finalist is selected, if theproposed escalators are not accepted by the Commonwealth.

� [A r]evenue sharing formula may be negotiated before a finalist is selected, ifthe proposed formula is not accepted by the Commonwealth.

� Minimum and/or maximum quantities of municipal, commercial and industrialrefuse to be guaranteed as inputs to the facility; also the periods for whichthey are guaranteed and the frequency with which minimums may bereadjusted will be negotiated.

� The sharing of risk will be negotiated as reflected in appropriate provision forforce majeure, and minimum revenues on the part of the municipalities andthe Contractor.

The Commonwealth’s decision to negotiate these major business terms with the

selected contractor, rather than specifying the business terms in the RFP,

reflected the Commonwealth’s commitment to encouraging private sector

innovation in the development of a resource recovery solution for northeastern

Massachusetts communities. However, this decision also meant that the user

fees contained in the proposals likely would not reflect the actual disposal costs

to the communities associated with the final agreements entered into by the

NESWC communities. The actual disposal costs would, of course, depend on

the business terms of these agreements.

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The Commonwealth selected Universal Oil Products to design, construct, andoperate the NESWC facility. (1975)

According to the RFP, four criteria would be used in evaluating the proposals:

� the system reliability

� the financial and operational qualifications of the contractor and the proposedsystem

� the net disposal fee, and

� the environmental impact and aesthetics.

Proposals would first be evaluated on the basis of the non-price criteria; those

deemed to have met these criteria would be evaluated on the basis of the

proposed user fee.

According to project records, 18 firms responded to the Commonwealth’s initial

request for qualifications, and these firms were provided with the RFP. Six firms

submitted proposals. The proposals were evaluated by teams consisting of

representatives of the Commonwealth, the area communities, MITRE, and the

U.S. Environmental Protection Agency. In August 1975, the Commonwealth and

MITRE recommended the selection of Universal Oil Products (UOP) to design,

build, and operate the largest of the three alternate facilities listed in the RFP.6

According to a written summary of the proposal evaluation process prepared by

the BSWD in August 1975, the selection of UOP was based on five major

considerations, including UOP’s “low disposal fee per ton”:

[The technology proposed by UOP] is a proven technology; there isa viable long term market commitment for the electric power; thefirm has strong financial and management capabilities; the process

6 In February 1983, as the result of a corporate merger, Wheelabrator-Frye, Inc., a predecessor toWheelabrator Technologies, Inc. and a former competitor to UOP in the solid waste field, becamethe developer of the NESWC facility. (Hereafter, both Wheelabrator-Frye, Inc. and WheelabratorTechnologies, Inc. will be referred to as “Wheelabrator.”)

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is environmentally sound; and there is a low disposal fee per ton .[Emphasis added.]

UOP’s proposed disposal fee of $4.70 per ton was calculated by adding an

estimated amortized capital cost for construction of the largest facility specified in

the RFP (capable of burning 930,000 tons of waste per year) to a proposed

operating cost, and subtracting the projected income from energy and other

sources, such as recovered materials, that would be paid to the user

communities. The proposal evaluation summary noted a series of variables that

could potentially change the user fee proposed by UOP, but dismissed the

impact of these variables as “minimal.”

The UOP facility will be capable of processing waste at a charge ofapproximately five dollars per ton, which is competitive withenvironmentally sound landfills and incinerators. This charge wascalculated from information provided by UOP, as well as basedupon certain assumptions which might be subject to change.Note that a change in any of the assumptions enumerated willhave only a minimal impact upon the ultimate disposal fee.

One of these assumptions included the method of financing and theinterest costs. . . . In addition, the use of industrial developmentbonds for solid waste facilities producing electric power must beapproved by the Internal Revenue Service.

A third variable that may effect [sic] the ultimate disposal fee is themethod and costs associated with the final disposal of the residue.Finally, the disposal fee may be affected by the escalation ofrevenues and operating costs, producing either a decrease orincrease in this fee. [Emphasis added.]

The summary did not address the possibility that oil prices might decline, thereby

decreasing the revenues received by the facility. (Finding 2 of this report

discusses the relationship between oil prices and facility disposal fees.)

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1c. By the time the NESWC facility beganoperations in 1986, UOP’s 1975 user feeproposal was irrelevant.

The NESWC facility, which was initially slated to begin operation in 1979, did not

begin operations until September of 1985. By that time, the plan to build the

large facility capable of burning 930,000 tons of waste per year – for which UOP

had proposed a user fee of $4.70 per ton – had been abandoned in favor of a

significantly smaller facility with a rated capacity of 465,000 tons per year. In

1975, MITRE had projected that UOP’s initial $4.70 per ton user fee would

decline to $1.10 per ton by 1989. The actual disposal fee paid by the NESWC

communities in 1989 was over $50 per ton. The changed size of the facility, the

business terms negotiated by the Commonwealth and UOP, and changed

economic conditions all contributed to the disparity between the projected and

actual disposal fees. (The projected and actual user fees to NESWC

communities are discussed in greater detail in Finding 4 of this report.) Thus,

UOP’s proposed user fee of $4.70 proved irrelevant to the actual project

finances.

The Commonwealth negotiated with UOP on behalf of prospective NESWCcommunities. (1975-1981)

During the initial six-year period after UOP was selected as the project

contractor, the Commonwealth and MITRE took the lead in negotiating the form

of the service agreements that would later be signed by participating

communities.7 The intention was for the participating communities to sign

separate but identical service agreements with MRI, the subsidiary of UOP

established to own and operate the NESWC facility. Project records show that

while a number of elected officials from communities in northeastern

Massachusetts and New Hampshire participated in some aspects of the

7 The initial service agreements signed in 1981 by Andover, North Andover, and Carlisle listed theBSWD as the communities’ authorized “Contract Community Representative.”

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negotiation process, the Commonwealth – through the BSWD and MITRE, its

consultant – was responsible for hammering out the technical and business

terms of the service agreements.

Finding 2.

The service agreements negotiated by the Commonwealth withUOP posed significant financial risks to participating NESWC

communities.

The economic feasibility of the 20-year service agreements would be affected by

changes in market conditions, environmental laws, and other factors that would

dramatically affect the amount of revenue the facility would produce and the cost

of operating it. Because these variable economic factors could not be predicted

over such a long period of time with a high degree of certainty, the project

inherently carried enormous financial risks. In theory, the service agreements

between MRI and each of the NESWC municipalities could have allocated the

risks so that each party bore a portion of the risk for factors which neither party

could control. The service agreements that the Commonwealth negotiated with

MRI, however, were skewed to place nearly all of the financial risks on the

NESWC communities.

The service fee formula calls for the NESWC communities to pay the debt

service for the facility and an amount that MRI calculated to cover its operational

costs and its profit. At the end of the 20-year contract term, MRI will own the

facility. In effect, the communities are buying the facility for MRI and providing

MRI with a guaranteed income stream to operate it, thereby eliminating most of

MRI’s risk for the venture. The financial burden placed on the communities by

this arrangement is, in theory, offset by their share – 89.5 percent – of the

electricity revenue. Contract terms that have contributed to the high costs that

the NESWC municipalities face today include the following:

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2a. The service fee formula places most ofthe financial risk from oil pricefluctuations on the NESWCcommunities.

The disposal fees that the NESWC communities pay under the service

agreements are based on a complex formula that adds together debt service, a

fixed operation and maintenance fee, and certain pass-through costs, then

subtracts facility revenues. The largest source of revenue is the sale of electricity

to the New England Power Company (NEP). The service fee formula credits the

NESWC communities with 89.5 percent of the electricity revenue, with the other

10.5 percent going to MRI.

A power purchase agreement, which established the terms for the sale of

electricity to NEP, was signed by MRI and NEP in January 1981 and

incorporated as an exhibit into the service agreements signed by the

communities. Under the power purchase agreement, the price of the electricity

produced by the facility is based on the electric utility’s “avoided fuel cost”, i.e.;

the price for the fuel (generally oil) that the utility would otherwise burn to

produce the same amount of electricity. Because the market price of oil is

subject to substantial fluctuations based on a myriad of political and economic

factors, the decision to tie the service fee so closely to this price was a high-risk,

high-stakes gamble.

Most power purchase agreements between electric utilities and resource

recovery facilities in Massachusetts, in contrast, are based on multi-year

projections of the utilities’ full “avoided costs,” according to Massachusetts

Department of Public Utilities documents. Avoided costs are the costs of fuel,

construction, and operation and maintenance that the utilities avoid paying when

they purchase electric power from resource recovery facilities rather than building

their own generating facilities. In addition to requiring the payment of full avoided

costs, some resource recovery facilities have locked-in or fixed purchase prices

over periods of 20 years or more.

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Because oil prices have not escalated as the Commonwealth projected, the

power purchase agreement between MRI and NEP has turned out to be an

excellent deal for NEP, but a very poor one for the NESWC communities. The

1997 price of 2.5 cents per kilowatt hour that MRI, the operator of the facility,

charged NEP for electricity generated by the facility was among the lowest prices

paid for power by utilities in the state. The power purchase agreement between

MRI and NEP was riskier than most other power purchase agreements signed in

Massachusetts between utilities and resource recovery facilities. 8 Because

MRI’s share of the electricity revenues from the NESWC facility was small in

comparison to the NESWC communities’ share, MRI has suffered less economic

harm from oil price fluctuations.

2b. The service agreements require theNESWC communities to compensateMRI for “unforeseen changes incircumstances” that adversely affectMRI’s profits.

The service agreements require the NESWC communities to compensate MRI

for a loss in profits that results from changes in the composition of the solid

waste, changes in the law, or any other change in circumstances that MRI did not

foresee when the service agreements were signed. The service agreements

contain the following language:

The Customer and MRI . . . recognize that, over the course of atwenty (20) year period, the possibility exists for the occurrence ofunforeseen changes in circumstances . . . of a continuing naturewhich could alter the financial conditions upon which thisAgreement has been based and entered into by MRI . . . .Accordingly, the Customer and MRI agree that in the event there

8 For example, a 1986 contract for the sale of power from a waste-to-energy plant in Springfield tothe Western Massachusetts Electric Company is a fixed-price arrangement that has helped keepdisposal fees stable to participating communities. Those electric power purchase prices startedfrom 8.7 cents per kilowatt hour in 1987 and moved up to a floor rate of 10.5 cents per kilowatthour in 1989, continuing through the end of the 25-year contract term. Disposal fees to thecommunities involved in the Springfield project have remained relatively stable, ranging from $50to $60 per ton.

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should occur any such [unforeseen changes in circumstances]having a major effect in altering the financial conditions upon whichthis Agreement was based and entered into by MRI, MRI shall havethe right, at its option, to request . . . that the Service Fee beadjusted . . . so as to restore equivalent financial conditions for theperformance by MRI of its obligations under this Agreement.

This one-sided provision further skews the risks of the NESWC project to the

detriment of the participating communities. Although the NESWC communities

bore the major brunt of the downturn in oil prices during the 1980’s, MRI relied on

this contract provision in 1989 to increase the service fee to make up for the

lower than expected profit from its 10.5 percent share of electricity revenue. On

December 12, 1989, MRI served upon NESWC a request for an adjustment in

the service fee based in part on a claim that the decline in oil prices constituted

an unforeseen circumstance that entitled MRI to a fee adjustment under the

service agreements. The NESWC communities disputed this claim and the

matter was referred to binding arbitration as required by the service agreements.

In 1992, an arbitration panel found in favor of MRI on the portion of the fee

dispute pertaining to the decline in oil prices, and awarded MRI approximately

$3.4 million. (Finding 7 of this report discusses the arbitration proceedings in

greater detail.)

2c. The NESWC communities may berequired to pay the full cost of capitalimprovements to the NESWC facilityrequired by new environmental lawseven though the facility will be owned byMRI at the end of the contract.

The service agreements require the NESWC communities to assume all risk of

increased operational costs as well as the costs of designing, constructing, and

financing improvements to the NESWC facility required to comply with any

change in environmental laws or regulations that occurred after January 1, 1979.

The potential cost of complying with changing environmental regulations over a

20-year period was and is incalculable.

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Moreover, the service agreements state that the full cost of designing, building

and financing required capital improvements must be amortized by the

communities over the remaining term of the 20-year service agreements, no

matter when the improvements are constructed. Thus, communities could be

required to amortize in as little as one year the full cost of improvements that

have a useful life of decades. This provision has proven to be onerous to the

NESWC communities.

The NESWC communities were faced, as of late 1997, with the prospect of

amortizing expensive improvements to the facility over a period of five years or

less. The state Solid Waste Act of 1987 and the 1990 federal Clean Air Act

amendments imposed new requirements for air pollution controls at the facility.

MRI has informed the NESWC communities that the cost for construction of the

retrofit improvements will be $43 million, a figure that does not include financing

costs. Construction is not scheduled to be completed before the year 2000. MRI

contends that under the terms of the service agreements, the NESWC

communities will be required to pay the entire $43 million cost, plus the cost of

financing, over the remaining five years of the contracts. In the year 2005, MRI

will own the improved facility free and clear, with the communities having paid for

air pollution controls that may have a useful life of 20 years or more.9

As of late 1997, the parties had not reached agreement on the final terms of the

air pollution control project. Although the final cost had yet to be determined,

MRI contends that the service agreements require the NESWC communities to

pay the full cost of improvements that will primarily benefit MRI as the owner of

the NESWC facility.

9 In 1996 and 1997, MRI proposed several new service agreements that would extend the lengthof the contracts until the year 2015, thus providing an additional ten years to amortize the cost ofthe improvements. Several NESWC communities indicated that they would not agree to a newcontract that would extend their obligations to MRI beyond the year 2005.

17


2d. The service agreements require theNESWC communities to pay for the costof disposing of a guaranteed minimumtonnage and contain a penalty fortonnage shortfalls.

In order to ensure a stable revenue stream from the service fees to pay the debt

service and MRI’s operating costs, the service agreements committed each

community to pay for a minimum number of tons of waste, regardless of whether

or not the community actually produced that amount of waste. Under this “put-or-

pay” clause, the communities have agreed to provide a guaranteed annual

tonnage to the plant of 203,000 tons per year. As of 1997, the NESWC

communities were only providing approximately 185,000 tons per year of waste

to the plant. At $95 per ton, that yearly shortfall of at least 18,000 tons of waste

has cost the NESWC communities more than $1.7 million a year.

In addition, the service agreements provide a method for assessing a shortfall

penalty for any community that fails to produce its minimum tonnage. The

shortfall penalty is intended to compensate MRI for the electricity and other

revenues it would have received had the community met its tonnage

requirement. However, MRI was not enforcing this penalty provision as of 1997,

according to the NESWC Executive Director. Whether the penalty provision is

enforced or not, the put-or-pay requirement in the NESWC service agreements

has been a disincentive to recycling for the NESWC communities.

The Commonwealth’s solid waste management policy in the 1990s has

emphasized the importance of recycling and composting. According to the 1994

state Solid Waste Master Plan, the total tonnage of municipal solid waste

disposed of at landfills or resource recovery facilities statewide decreased by six

percent between 1990 and 1992, due in large measure to increased recycling

and composting efforts. Based on the increasing number of municipal recycling

programs, the Commonwealth predicted that the 28 percent of municipal solid

waste that was recycled or composted in 1992 would increase to 34 percent by

18


1996. Cost savings from reduced disposal fees have proved to be a key

incentive contributing to the increasing rate of recycling and composting. The

NESWC communities, however, have been unable to take advantage of these

savings.

Finding 3.

The Commonwealth aggressively marketed the NESWC projectto Massachusetts communities.

Beginning in the late 1970s, the Commonwealth mounted an aggressive

campaign to market the NESWC project to prospective communities by making

presentations to local officials and voters in communities throughout northeastern

Massachusetts and southern New Hampshire. In addition to promoting the

NESWC project, project records show that the Commonwealth issued frequent

warnings to the effect that available landfill space was disappearing and that

existing landfills would be ordered closed due to environmental violations.

For example, in a January 1979 letter to the Andover Town Manager, the

Commissioner of Environmental Management warned of increased costs and

“crisis management” if Andover and other communities did not sign on promptly

with the NESWC project:

Stricter requirements will eliminate many landfills and increasethe costs of those that remain. If municipalities do not maketimely decisions now to assure the availability of the NESWCfacility, many municipalities . . . can be expected to enter aperiod of crisis management . . . . I urge each and everymunicipality to recognize this problem for what it is and to realizethe immediacy of the need for a positive decision on the NESWCcontract. . . . It is important that each city and town in theNortheastern Massachusetts area have this item on its agenda, attown meetings or in city council. [Emphasis added.]

The Administration continued to issue such warnings in the ensuing years. In

April 1979, the Lawrence Eagle-Tribune reported that the Governor had sent

letters to communities in the greater Lawrence area, warning that many of their

19


landfills violated state regulations. A January 1981 article in the Boston Globe

quoted the Secretary of Environmental Affairs as stating that 45 out of 59 landfills

in use in northeastern Massachusetts were in violation of state environmental

regulations, and that the landfills serving 50 of 74 communities expected to be

served by the NESWC plant were projected to be full by 1985.

Project records show that some communities objected to the Commonwealth’s

pressure to participate in the NESWC project. In March 1978, for instance, the

Methuen Town Manager took issue with a characterization by the state

Department of Environmental Quality Engineering of the town landfill as an “open

dump with . . . frequent burning and smoldering fires,” according to the Lawrence

Eagle Tribune. The Town Manager charged, according to the news article, that

the Commonwealth was attempting to force Methuen to join the NESWC project.

According to minutes of a August 28, 1980 meeting attended by representatives

of the Manchester Board of Health and UOP, the UOP representative stated that

the Commonwealth would no longer participate with UOP in marketing the

NESWC project to communities. The Manchester Board of Health

representative, according to the minutes, commented that this was a step in the

right direction and that the Commonwealth had:

intimidated the area towns by voicing an implied threat if the townsdid not agree to participate in the “State sponsored” NESWCprogram.

The Commonwealth’s efforts to promote the NESWC project continued. In an

April 1981 letter addressed broadly to “community leaders,” the BSWD Director

emphasized the Commonwealth’s financial investment in developing and

promoting the NESWC project while disclaiming any intent on the part of the

Commonwealth to impose the project on communities:

[T]he Bureau has invested a substantial portion of its budget overthe past few years in technical, financial and legal consultants whohave been retained to assist the NESWC communities indeveloping and analyzing this project. . . .

20


It is not our intent to impose this project on any community. Rather,we intend only to make available, upon your request, support toassist in your analysis of the NESWC project. If other long-termsolid waste options are presented to you, you should obviouslycompare them to the NESWC option.

The Commonwealth considers the NESWC Project to be anexcellent solution to the critical solid waste problem now facingmost communities in northeastern Massachusetts. I encourage youto make an early informed decision as to which long-term solidwaste disposal option is best for you. [Emphasis added.]

The Administration’s lobbying efforts on behalf of the NESWC project culminated

in an April 1981 signing ceremony in the Governor’s office for the first three

towns to join the NESWC project: Andover, North Andover, and Carlisle.

Notwithstanding the Commonwealth’s marketing efforts, other communities that

had originally expressed interest in the project declined to participate.

Competition to the NESWC project had emerged during this period from

Wheelabrator10 and a firm called Refuse Fuels, Inc, both of which were planning

waste-to-energy facilities that would serve communities stretching from the

Greater Lawrence area to the Boston suburbs of Arlington, Waltham, and

Watertown. According to project records, the NESWC project ultimately lost

Haverhill, Lawrence, and Lowell in the competition with Refuse Fuels.

Finding 4.

The NESWC project risks were depicted as minimal in publicitydisseminated by the Commonwealth and UOP.

The financial risks of the NESWC project were regarded and depicted by the

Commonwealth as low, largely because of the expectation that the NESWC

communities would garner significant revenues from the sale of electricity by the

NESWC facility to NEP. For example, in a January 1979 letter to the Andover

21


Town Manager, the DEM Commissioner characterized the NESWC project’s

energy market as “guaranteed” and touted the project as an “economically sound

solution” offering attractive revenue sharing arrangements and low disposal fees:

a proven, reliable technology, guaranteed performance ofequipment and operation, guaranteed energy production,guaranteed energy market , guaranteed compliance withenvironmental standards, attractive revenue sharingarrangements, (and) low disposal fees . . . . Great care, analysisand professional expertise have gone into developing this solution.Competitive proposals were extensively evaluated. A contractwas negotiated to protect the interest of the municipalities . . . .All of this effort makes available to municipalities an opportunity tosolve an increasingly serious problem with a proven, reliable,environmentally and economically sound solution into the nextcentury. [Emphasis added.]

Project records contain a promotional information packet, apparently prepared by

UOP, that projected the “guaranteed” energy revenues and additional anticipated

revenues from the NESWC project. However, an attachment to the packet

labeled “Cost and Revenue Assumptions” made it clear that the term

“guaranteed” applied only to the NESWC facility’s energy recovery rate11 and the

89.5 percent share of the energy revenues to be received by the NESWC

communities. The projected energy price of five cents per kilowatt hour, which

underlay the revenue projections for the NESWC facility, was not guaranteed

under the terms of UOP’s electric power agreement with NEP. Thus, the

participating NESWC communities were not guaranteed a minimum level of

energy revenues. Those revenues would rise or fall, based on the price of oil.

In other communications to prospective NESWC communities, UOP made no

reference to this and other risks of the NESWC project. In a May 1981 letter

broadly addressed to community representatives, UOP’s Vice President and

10 The “128-West” resource recovery project promoted by Wheelabrator in the early 1980s wasnever constructed. As a result of a 1983 corporate merger, Wheelabrator became the owner ofMRI and the developer of the NESWC project.11 UOP was guaranteeing the energy recovery rate of 395 kilowatt hours of electricity per ton ofsolid waste having a heating value of 4200 Btu per pound.

22


General Manager called attention to the signing ceremony in the Governor’s

office and characterized the NESWC project as “the most economically

advantageous project in the United States”:

The revenue-sharing North East Solid Waste Committee (NESWC)resource recovery project achieved a milestone April 23 with theinitial signing of the 20-year service agreement[s] by NorthAndover, Andover and Carlisle.

Enclosed for your interest is a copy of the news release andphotograph of the ceremony held in the office of Governor EdwardJ. King. . . .

The conclusions of the towns who have signed as well as theseveral additional towns who have already authorized signing areunanimous:

1. The most economically advantageous project in the UnitedStates.

2. Legal and financible contract.

3. Proven, reliable technology.

4. Lowest tipping fee.

5. Likelihood of declining disposal cost over time.

The time for decision is now. There is no project in the U.S.currently or prospectively that offers communities as attractive along-term solution as NESWC. We urge your expeditiousconsideration. [Emphasis added.]

Project records show that the Commonwealth’s consultants provided the

Commonwealth with assurances that the projections underlying the NESWC

project economics were sound. For example, in a March 1981 letter to the

BSWD director, a MITRE consultant alluded to risks to be assumed by the

NESWC communities but did not include declining oil prices among those risks:

[W]hile UOP accepts guaranteed capital and operating cost risksand performance risks, the communities assume the risk for costsincurred due to facility outages that are not the fault of UOP. Onbalance, we believe that such risks to the communities have been

23


acceptably minimized through the choice of technology, company,and energy market.

MITRE has prepared estimates for energy revenue and those costelements for which the communities are responsible, such asresidue disposal and insurance, and has reviewed the constructionand operating costs guaranteed by UOP and considers them to bereasonable and comparable to costs of similar facilities. In ouropinion, the projected disposal fee based upon such costs andrevenues has been prepared using sound estimating practices. . . .

In summary, it is MITRE’s opinion that the proposed NESWCproject employs reliable technology, has a strong energy marketagreement, and provides an environmentally and economicallysound solution for communities with solid waste disposal problemsin northeastern Massachusetts and southern New Hampshire.

However, warnings of the risks posed by the NESWC project were sounded by

others. The Southern Essex Solid Waste Council (SESWC), a quasi-public

organization analogous to NESWC that was developing a resource recovery

project in Essex County, produced a 10-page critique of the NESWC project in

1978. SESWC’s critique contended that the then-draft service agreements

between the NESWC communities and MRI placed too many of the project risks

on the communities. The SESWC critique took issue with a provision of the

NESWC draft agreement that, in effect, guaranteed a continuing level of profit to

UOP in the event of changes in laws, composition of waste, and unforeseen

circumstances. The provision remained in the service agreements and was later

cited by MRI as the basis of a requested increase in the NESWC disposal fee in

1989.

A second source of warnings about the NESWC project was Refuse Fuels, Inc.,

a firm promoting a competing waste-to-energy project for the region. Refuse

Fuels provided area towns in January 1982 with a comparative risk analysis,

warning that the projected revenues from NEP under the NESWC project were

based on “best case” scenarios developed by the Commonwealth’s consultant.

The analysis noted that the NESWC disposal fee was based on several variables

that “could drastically increase a community’s costs.”

24


In October 1982, CSI Resource Systems, Inc. conducted an analysis for the

Town of Methuen, which examined a number of disposal alternatives available to

town at the time, including the Refuse Fuels proposal. The analysis concluded

that of the alternatives examined, the UOP proposal carried the “lowest potential

disposal cost (to Methuen) for the highest potential risk.” Methuen ultimately

chose not to join the NESWC project, and joined the Refuse Fuels project

instead.

Ironically, Wheelabrator issued warnings about the potential risks of the NESWC

project. In promoting the competing “128-West” project, a Wheelabrator Vice

President wrote the following in a January 1982 letter to the Arlington Town

Manager:

The comparative economics of all the projects presented by theState Bureau of Solid Waste and their consultants, in my opinion,are not realistic, and do not represent today’s costs. . . . As far asrisks are concerned, I suggest you ask the State’s legal consultantfor his evaluation. He negotiated the 128 Contract and is intimatelyfamiliar with it and NESWC. You need only ask one question:‘Which contract provides less risk to my town?’

Wheelabrator would subsequently replace UOP, by means of a corporate

merger, as the developer of the NESWC facility.

A comparison of the actual disposal fees paid by the NESWC communities since

the facility began operating in 1985 with fees projected by UOP and the

Commonwealth during their joint marketing efforts in 1981 shows how optimistic

those projections were. A 1981 UOP promotional packet contained projections

of disposal fees starting at $8 per ton in 1985 and dropping to a negative $75 per

ton by 2005. In other words, the communities were told they would actually

make $75 per ton by delivering waste to the facility in 2005. The break-even

year, in which the disposal fee would be zero, was projected to be 1990.

In actuality, disposal fees rose steadily from $28 per ton in late 1985 to $95 per

ton in 1997. Public Financial Management, Inc., a NESWC consultant, projected

25


in 1997 that disposal fees will rise to $215 per ton by the year 2004. The

projected increase during the final six years of the service agreements is in part

due to the required addition of air pollution control equipment to the NESWC

facility. Figure 1, below, compares the 1981 projections given to the NESWC

communities by UOP and the Commonwealth with the actual and projected fees

as of 1997. The 1997 projections shown in Figure 1 include the $43 million

estimated cost of retrofitting the NESWC facility with new air pollution control

equipment as required by state and federal legislation.

Even without the $43 million retrofit, the 1997 projected fees to the NESWC

communities would be substantially higher than those projected by UOP and the

Commonwealth back in 1981, as Figure 2 shows.

Figure 1NESWC DISPOSAL FEES

1981 Pro jected Fees vs. 1997 Actual/Pro jected Fees (With Retrofit )

-100

-50

0

50

100

150

200

250

1985 1990 1995 2000 2005

Years

Dol

lars

Per

Ton

($/

ton)

Actual Fees to 1997;Projected to 2005 (withretrofit)

1981 UOP ProjectedFees

Sources: NESWC, UOP, and Public Financial Management, Inc.

26


Finding 5.

The Commonwealth did not conduct a meaningful competitionin selecting the consulting engineer responsible for

overseeing construction of the NESWC facility.

As noted earlier in this report, the Commonwealth had initially contracted with

MITRE in 1974 to conduct the resource recovery siting study that led to the

selection of UOP to design, build, and operate the NESWC facility. The

Commonwealth continued to contract with MITRE through 1981, at which time

MITRE moved its Massachusetts operations to Virginia. At that time, several

MITRE employees involved in the NESWC project moved to the firm of Roy F.

Weston, Inc.

In October 1981, the Commonwealth executed an amendment to its contract with

MITRE, changing the contractor’s name from MITRE Corporation to Roy F.

Weston, Inc. From 1981 to 1983, Weston worked for the Commonwealth on the

planning and implementation of the NESWC project .

Figure 2NESWC DISPOSAL FEES

1981 Pro jected Fees vs. 1997 Actual/Pro jected Fees (Without Retrofit )

-100

-50

0

50

100

150

200

1985 1990 1995 2000 2005

Years

Dol

lars

Per

Ton

($/

ton)

Actual Fees to1997; Projected to2005UOP 1981Projections

Sources: NESWC, UOP, and Public Financial Management, Inc.

27


In February 1983, the Commonwealth selected Weston to serve as the

consulting engineer to oversee the construction and acceptance-testing of the

NESWC facility. Although the Commonwealth solicited proposals to serve as

consulting engineer from three firms, including Weston, Weston was the only firm

to submit a proposal. A memorandum prepared by the BSWD Director

recommending selection of Weston as the NESWC consulting engineer

emphasized the previous NESWC experience of the Weston consultants while

dismissing the other two firms as having declined to compete “for various

reasons”:

Roy F. Weston personnel were intensely involved in theconstruction agreement negotiations and in the preparation of thefeasibility study. It is not uncommon for engineering firmsperforming such tasks to continue as the Consulting Engineer asrecommended here.

The Bureau (BSWD) has solicited responses from two othernationally known engineering firms located in Boston, whodeclined for various reasons. [Emphasis added.]

According to the NESWC Executive Committee minutes of the meeting held on

February 14, 1983:

[BSWD’s consultant] reported that to date, only one proposal hasbeen received for a consulting engineer, from Roy F. Weston.

According to BSWD records, however, the other two firms declined to compete

for the contract because the BSWD had given them only 24 hours to prepare

proposals. Under these circumstances, there could have been no meaningful

competition.

UOP and MRI entered into an agreement to construct the NESWC facility. (1983)

In 1983, UOP entered into a $96,750,000 construction agreement with its

subsidiary, MRI, to build the NESWC facility. Before construction began, the

construction price was increased $100,350,000.

28


Finding 6.

The construction agreement negotiated between UOP and itssubsidiary, MRI, did not protect the interests of the NESWC

communities.

When the Commonwealth sought proposals in 1974, it indicated that it intended

to select a contractor who would design, build, and operate the facility. The

Commonwealth’s rationale was that this design/build/operate approach would

enable the Commonwealth to select one private entity that would assume all

responsibility for the project. After the Commonwealth selected UOP for the

contract, it proceeded to negotiate the service agreements that would govern the

rights and obligations of the NESWC communities and of MRI, the owner and

operator of the facility. The Commonwealth did not, however, attempt to define

the terms of the construction contract under which UOP would construct the

facility. In 1983, after 22 NESWC communities had signed service agreements,

UOP negotiated the terms of the construction agreement with MRI, its own

subsidiary.

The Commonwealth’s approach to the project failed to protect the interests of the

NESWC communities. Although the Commonwealth retained a lawyer to

participate in the negotiations, the structure of the contracting arrangement –

which allowed the two affiliated corporations to deal with each other – invited

abuse. Neither the Commonwealth nor the NESWC communities were parties to

the construction contract, nor did the contract allow them any input into the

design of the NESWC facility.

Under the Commonwealth’s design/build/operate approach, UOP would be

accountable not for constructing a facility in accordance with detailed design

specifications, but rather for constructing a facility that would meet certain

performance guarantees. For this reason, the performance guarantees were

vital to ensuring that UOP did not deliver a substandard facility.

29


However, the construction agreement gave UOP primary control over the terms

of the performance guarantees and the acceptance test procedures that would

be used to determine that the guarantees were met. Under the construction

contract, UOP would conduct the acceptance test upon completion of the facility.

Both MRI and Weston, as the consulting engineer, would have the right to be

present during the acceptance test and to review the results of a report prepared

by UOP certifying the results of the test. If either MRI or Weston disputed UOP’s

determination that the guarantees were met, the matter would be referred to an

independent engineer. MRI accepted the facility in 1985 with Weston’s

concurrence.

Evidence surfaced in a subsequent arbitration proceeding that suggests that MRI

may have manipulated the acceptance test procedures to conceal design and

construction deficiencies at the facility. Weston testified in the arbitration

proceeding that because MRI misrepresented certain conditions under which the

acceptance test was conducted, Weston was unable to detect the failure to meet

a key performance guarantee. This evidence is discussed in Finding 7 of this

report.

Wheelabrator became the developer of the NESWC facility. (1983)

In February 1983, as the result of a corporate merger, Wheelabrator became the

owner of MRI and the developer of the NESWC facility.

The NESWC project was financed. (1983)

In April 1983, the North Andover Industrial Finance Authority issued $197 million

in revenue bonds to finance the NESWC facility. At that point, 22 communities

had signed 20-year service agreements to send their waste to the NESWC

facility.12 Construction of the facility began in May 1983 and was scheduled to

12 The project was able to recruit only one additional community after 1983: the Town of WestNewbury executed a service agreement with MRI in December 1986.

30


take three years to complete. The facility began commercial operations in

September 1985, roughly eight months before the scheduled completion date.

The Commonwealth formalized and then terminated its agreement to representthe NESWC communities. (1983-1984)

In November 1983, with construction underway, the BSWD signed an agreement

with the NESWC Executive Committee – an 11-member panel chosen by

representatives from each participating community – to act as the communities’

Contract Community Representative. This agreement formalized the BSWD’s

longstanding role in promoting and managing the NESWC project, including

negotiating the 1981 service agreements and several changes to those

agreements in 1982.

Over the ensuing year, however, the BSWD took steps to reduce its involvement

in the NESWC project. In December 1994, the Commissioner of Environmental

Management notified the Chairman of the NESWC Executive Committee that the

1983 the BSWD’s agreement to serve as the NESWC communities’ Contract

Community Representative would be terminated within 90 days.

Even before construction of the NESWC facility was completed, NESWC was

appealing to the Commonwealth for help in coping with increases in the projected

disposal fees to the NESWC communities. In a December 1984 letter to the

Governor, the NESWC Executive Committee Chairman had written, in part:

The bulk of the waste from the twenty-two communities is nowbeing landfilled at about $13/ton. Over the first four years ofoperation at the NESWC facility, the processing fee is expected toaverage $34/ton, with considerable risk that it may be appreciablyhigher. . . . Indeed for some towns, overall solid waste disposalcost[s] may more than triple.

The Arlington Town Manager also wrote to the Governor in December 1984 to

request state financial assistance for the NESWC communities. His letter stated,

in part:

31


The Bureau of Solid Waste Disposal worked with us, hand in hand,throughout the entire planning, contractual, and construction phaseof the entire [NESWC] project.

Unfortunately, we now find ourselves faced with increases in tippingfees that could more than double next year. . . . Clearly, as weattempt to continue to implement Proposition 2½ and otherpressing local needs, we need special help on this particularproject.

Finally, we feel there is also a very important principle involved inour plea. Rightly or wrongly, the state helps those communitiesthat find themselves in financial difficulty because ofmismanagement and/or poor fiscal planning. We now ask that yougive the same assistance to those communities which have madethe tough decisions, exercised prudent management and fiscalplanning, but nevertheless find themselves faced with extraordinaryincreases in the cost of solid waste disposal. [Emphasis in theoriginal.]

According to project records, NESWC Executive Committee members met with

the Governor and with the DEM Undersecretary on December 19, 1984. A

memorandum prepared by the NESWC Executive Committee Chairman after

these meetings characterized the Governor as “very supportive in understanding

the project situation and trying to find ways together to reduce the tipping fee for

the first five years.” According to the memorandum, the DEM Undersecretary

agreed to use the Commonwealth’s “influence” to urge NEP to renegotiate the

power agreement with the NESWC facility. However, subsequent negotiations

with NEP proved unsuccessful until the mid-1990s, when NEP agreed to

increase its electricity price by one-half cent per kilowatt hour. 13

The NESWC facility began operations. (1985)

In September 1985, the completed NESWC facility began commercial

operations. By this time, the Commonwealth had withdrawn altogether from the

NESWC project. Nevertheless, the 1985 Solid Waste Master Plan issued by the

13 In 1995, NESWC interceded in the power purchase agreement between MRI and NEP, andnegotiated a supplemental payment of approximately one-half cent per kilowatt hour.

32


Governor and the Secretary of Environmental Affairs depicted the

Commonwealth and Massachusetts towns as partners working together to meet

the “solid waste challenge” and asserted that the Commonwealth would continue

to promote regional solutions:

The solid waste challenge will be solved only if the Commonwealthand her communities work together as partners. That much isclear. Less clear are the terms of the partnership. Amidstconflicting assertions that solid waste is a local responsibility(because it derives from the municipal function of trash collection)or a state responsibility (because the public health is at issue), wepropose a division of roles that is thoughtful, realistic, and fair. . . .

With regard to waste management, it is the Commonwealth’sresponsibility to promote regional disposal and recyclingsolutions . It is the responsibility of cities and towns to adoptmodern, long-term trash disposal solutions that makeenvironmental and economic sense, and to bear the legitimate localcosts of those solutions. [Emphasis added.]

Legislation was enacted to establish NESWC as a public instrumentality. (1988)

In 1988, NESWC, which had remained an informal organization, was

incorporated as a public instrumentality under Chapter 328 of the Acts of 1988.

As a public instrumentality, NESWC now had legal authorization to do such

things as file lawsuits and make legally binding contracts. The legislation also

codified into law the existence of a NESWC advisory board consisting of one

representative from each contract community, and executive and other

committees.

The Commonwealth regulated and criticized the NESWC project over thefollowing decade. (1985-1995)

Over the decade following the issuance of the 1985 master plan, the

Commonwealth’s focus shifted from promoting specific resource recovery

projects to regulating the pollutants emitted by these projects and promoting

recycling as an alternative to solid waste combustion. The Commonwealth had

33


become increasingly concerned about the air pollutants emitted by resource

recovery facilities, including sulfur dioxide, hydrochloric acid, emissions of dioxin

and furans, and heavy metal particulates, including mercury and lead.

Accordingly, the Solid Waste Act of 1987 required all resource recovery facilities

to operate with acid gas scrubbers, an expensive form of pollution control

equipment primarily designed to control sulfur dioxide emissions.

Although the NESWC facility was constructed with electrostatic precipitators,

which are designed to control particulate matter, it was not constructed with acid

gas scrubbers. The installation of scrubbers required by the Solid Waste Act of

1987 would have a major financial impact on the NESWC communities,

accounting in large measure for the projection by NESWC’s financial advisors of

an increase in disposal fees from $95 per ton in 1997 to more than $215 per ton

by the year 2004.

The Commonwealth’s 1990 master plan entitled “Toward a System of Integrated

Solid Waste Management” noted the financial impact on communities of resource

recovery projects such as the NESWC project, particularly the impact of put-or-

pay provisions:

[U]ntil passage of the Solid Waste Act, long-term contracts withsolid waste disposal facilities locked Massachusetts cities andtowns into obligations to deliver a minimum tonnage, effectivelydiscouraging recycling.

Similarly, the 1994 Update to the Massachusetts Solid Waste Master Plan cited

put-or-pay provisions as barriers to increased recycling in the Commonwealth

and warned:

Many communities have signed long-term contracts committing setquantities of waste for disposal at combustion facilities. Expandingrecycling can reduce the tonnage of solid waste needing disposal toa level below the minimum guaranteed tonnage. Depending on theparticularities of the contract and the practice of the facilityoperator, a community may be obligated to pay the combustionfacility operator a disposal fee for materials the community diverted

34


into a recycling or composting operation. This situation causes themunicipality to pay twice for management of the same ton of waste.

An earlier draft of the 1994 Update had proposed the establishment of a $5

million, five-year fund to assist communities whose guaranteed annual tonnage

contracts require them to pay fees for waste diverted from disposal to recycling

or composting. However, this funding proposal was deleted from the final 1994

Update.

NESWC clashed with MRI over the disposal fees paid by the NESWCcommunities. (1989-1992)

A contractual dispute between NESWC and MRI was brought before an

arbitration panel in 1992. The arbitrated dispute arose from a 1989 claim by MRI

that it was owed an upward adjustment in the disposal fee based on two

provisions in the service agreements. The first provision called for MRI to be

compensated by the NESWC communities for any unforeseen changes in

circumstances that adversely affected its profits. As discussed in Finding 2b,

MRI successfully contended that lower-than-projected oil prices constituted an

unforeseen circumstance that entitled MRI to additional compensation. The

second provision raised by MRI required the NESWC communities to guarantee

the composition of the solid waste delivered to the facility. MRI claimed that the

energy content of the waste delivered by the NESWC communities was higher

than that specified in the service agreements. MRI further contended that the

high heat content of the waste was fouling the NESWC facility’s boilers and

increasing MRI’s operation and maintenance costs. The arbitration panel found

that MRI did not produce adequate evidence to support its claim that the

composition of the waste provided by the NESWC communities had caused

higher operating costs. In preparing its defense to MRI’s claim, however,

NESWC discovered evidence that may support a claim against MRI.

35


Finding 7.

NESWC uncovered evidence that MRI might have manipulatedthe acceptance tests of the NESWC facility to conceal design

and construction deficiencies.

In order to counter MRI’s claim that the fouling of the facility’s boilers was caused

by the high heat content of the communities’ waste, NESWC filed discovery

requests to obtain documents from MRI related to the design and construction of

the facility. MRI produced the records pursuant to an arbitrator’s order that

precluded NESWC from disclosing their contents. Records obtained by NESWC

pursuant to discovery as well as testimony presented in the arbitration indicated

that the fouling of the boilers may have been the result of inadequate design and

construction.

Under the construction contract between MRI and Wheelabrator, the NESWC

facility was required to pass certain acceptance tests prior to its acceptance by

the NESWC communities. The purpose of the acceptance tests was, in part, to

establish that the facility met a required capacity guarantee. The construction

contract provided for liquidated damages to be paid by Wheelabrator based on a

capacity shortfall in the event that the facility failed to meet the capacity

guarantee. The construction contract also contained an incentive for early

completion in the form of a $45,000 per day bonus for Wheelabrator.

Evidence provided to NESWC in discovery indicates that the NESWC facility

capacity may be inadequate to meet the capacity guarantee. According to

testimony presented in the arbitration, Wheelabrator might have avoided

approximately $20 million in liquidated damages by representing that the facility

met the capacity guarantee. Other testimony indicates that Wheelabrator also

received an early completion bonus based on MRI’s representation that the

facility had passed the acceptance tests. The records this Office has reviewed

indicate that the amount of the early completion bonus may have been more than

$10 million.

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In the arbitration proceeding, NESWC alleged that MRI manipulated the

acceptance test to make it appear that the NESWC facility met the capacity

guarantee. NESWC’s allegation was not addressed by the arbitration panel’s

decision. NESWC, MRI, Weston, and other parties involved in the NESWC

project entered into a standstill agreement in 1991 to preserve their legal claims

arising from the design or construction of the facility.

This Office obtained from a confidential source copies of correspondence

between Wheelabrator and Martin, the manufacturer which designed the boilers,

as well as other records produced during arbitration that tend to support the

allegations raised by NESWC in the arbitration. This Office has requested from

NESWC additional records produced by MRI and others during the arbitration.

MRI has attempted to block this Office’s access to those records by seeking an

injunction in Superior Court prohibiting NESWC from releasing them. MRI claims

that it is entitled to this injunction because the records belong to MRI and were

provided under a confidentiality agreement that prohibits NESWC from disclosing

their contents.

This Office is pursuing legal action to obtain the records of the arbitration

proceeding. NESWC and its legal counsel, Palmer & Dodge, have agreed to

cooperate with this Office in obtaining the records. To date, MRI has succeeded

in shrouding in secrecy evidence that may provide a legal basis for a claim by

NESWC against MRI. This Office will continue to investigate the allegations

raised by NESWC in the arbitration proceeding.

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Conclusion

This report focuses on the history of the NESWC project and the terms of the

deal that have made it so costly to Massachusetts taxpayers. The NESWC

communities were persuaded by low projected solid waste disposal fees to sign

20-year service agreements. These projected fees were developed by the

Commonwealth and its technical consultant, who predicted that a continuing rise

in oil prices would boost the revenue from the sale of electricity, thereby reducing

the disposal fees. The predicted low disposal fees did not materialize. Instead,

when the NESWC facility began operation in 1986, the NESWC communities

were faced with disposal fees that were far higher than expected – and have

continued to climb. The NESWC communities currently pay approximately $95

per ton for waste disposal, nearly twice the current market price for solid waste

disposal in the region. The cost is projected to reach $215 per ton by 2004.

The NESWC story contains vitally important lessons for all public officials about

the potential cost of long-term contractual arrangements that allocate most of the

risks to the public sector. These lessons are particularly timely for the

communities that are currently considering proposals from private contractors for

long-term contracts to upgrade, operate, and maintain public water and

wastewater facilities. Some public officials are attracted to these long-term

public-private partnerships because they appear to offer a mechanism for

avoiding debt limitations that restrict access to capital for needed upgrades.

Industry proponents also claim that these arrangements can ensure low, stable

water and sewer rates.

The NESWC communities have learned that long-term cost projections that do

not adequately factor in project risks can be dangerously misleading. The current

momentum to privatize wastewater treatment facilities without adequate planning,

safeguards, and oversight could similarly burden current and future taxpayers and

ratepayers in Massachusetts with massive long-term costs and risks. This Office

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will continue to investigate the NESWC project and to subject new public-private

partnership proposals to the critical scrutiny they warrant.

the northeast solid waste committee project: planning and

Documents